A Wealth of Common Sense: Misbehaving in a Volatile Market
Market volatility has soared in recent weeks. Typically, volatility measures how much investors expect the stock market to move on a daily basis in the weeks ahead.
With volatility elevated, it’s likely that stocks will continue to see big swings every day. That’s true even if the market doesn’t materially move much in a given week. The move in volatility is also likely to create opportunities for investors. However, it’s important to learn the right lessons.
For instance, stocks delivered some strong rallying days over the past few sessions. Consequently, some may think the market correction is over. That may not be true. Neither is it true that a down day for stocks could just be part of a further indefinite decline.
Volatility tends to lead to snap judgments based on the market’s recent moves, known as a recency bias.
In the meantime, investors often fall into the trap of confirmation bias. They may look specifically for information to support their worldview. In doing so, they discount data that may contradict their worldview.
For now, investors should take an objective look at their open positions. And determine if they’re still worth holding in the current environment. Holding great companies over the long haul tends to work out well as a strategy. Market fears will subside in time.